Industrial Strategy: British Business Bank

Lord Leigh of Hurley Excerpts

Tuesday 8th July 2014 Lords Chamber

[Lord Leigh of Hurley (Con)]

My Lords, I thank my noble friend Lady Wheatcroft for instigating this debate. Her insightful remarks come as a result of her very distinguished career as a business journalist at the Times and the Wall Street Journal, where her articles were a must-read for any businessperson for many years. I am particularly pleased to be able to take part in this debate because the financing of SMEs is an area in which I have had an interest all my working life. I refer your Lordships to my various interests as declared in the register of interests. I shall focus my remarks on the British Business Bank.

It was very clear to many of us in 2010, when the coalition Government first came to power, that the country’s finances had been left in a ghastly state in many areas and directions. It was not just the out-of-control debt and deficit which were threatening the whole economy and country, but the shock of the global financial crisis meant that banks were making life extremely difficult for many perfectly good businesses that desperately needed finance, both for working capital, or short-term finance, and longer-term equity injection.

It is probably safe to say that the incoming Government were shocked by the inability of the traditional banks at that time to take on the role they had previously undertaken in providing finance to SMEs and were acting a bit like rabbits caught in the headlights. The numbers bear this out. Successful loan applications for SMEs had dropped from 88% in 2007 to 65% in 2010, as opposed to 76% in Germany. In addition, the changing capital requirements, commonly known as Basel III, applied a risk weighting system with increased premiums for lending to SMEs which simply exacerbated one of the main areas in the UK for retail clearing banks. Indeed, it seemed clear that the retail banks simply could not, or would not, lend money to SMEs and found themselves incapable of doing so on a cost-effective basis. As the noble Lord, Lord Haskel, mentioned in the debate on Thursday on manufacturing, the noble Lord, Lord Young, reminded us of his recent enterprise report and noted that more than 95% of firms in this country currently employ fewer than 10 people. Smaller businesses are crucial to economic growth, and the current ratio of 80% of UK smaller business having as their bankers one of the four big banks is not sustainable.

There are particular circumstances for SMEs, which mean that they need special help. Many do not have a finance director but rely on the owner’s ability to do a service function and many other functions, and they rarely have time to shop around for finance. Indeed, research shows that 71% of SMEs seek finance only from their existing provider and, on average, in terms of median, the time spent by all SMEs looking for alternative sources of finance is less than one hour. Like all of us, SME owners do not enjoy filling out forms. Accordingly, in 2010, the word was out that banks were no longer interested in lending to them and, as a result, the problem became self-fulfilling as SME owners did not bother to apply to banks for such finance.

It then transpired that around the world, as the noble Lord, Lord Haskel, said, there were better ways of doing business. The noble Lord, Lord Stoneham, mentioned that in Germany there was the successful KfW model, which dwarfs anything that has been done in this country. We were the only country in the G8 not to have a comparable institution—by which I mean an institution that lends and invests in banks themselves. This is the work of the British Business Bank, which is probably misnamed. Although it is certainly British and certainly business-focused, not domestic, it is not really a bank as commonly understood, but rather an investor in challenger start-up organisations, which themselves pump-prime finance in a mixture of debt and equity to their own clients. This is infinitely preferable to the well trodden route of government direct intervention and subsequent massive write-off and losses.

I understand that the British Business Bank is tasked to achieve a return roughly equivalent to five-year gilts. It is not money that is written off; it is money on the books of BIS that seeks a return. I hope that we see full transparency on the results of BBB and, equally important, of each of its partners, some of whom, such as the start-up loans, will find profitability a stretch. I note that £300 million has been allocated to the investment programme to promote choice and competition in business finance, of which £203 million has been recommended. This is an excellent initiative, but it contains a large element of risk. Trying to achieve a return comparable to five-year gilts will prove a challenge.

There has in the past, before BBB, been a plethora of direct schemes available to entrepreneurs but, as I have said in this House, finding out about government grants and availability of funds has not been easy. Although the Government have reduced the schemes down to one government website, which is very helpful, the results are not produced in a way that is easy for an entrepreneur to select the appropriate scheme. The last time I looked, I found 791 schemes available to entrepreneurs seeking grants. I then tried a more selective search and I chose to look for a business in London with up to 250 employees in the service sector; by pressing the button, I was offered 42 grants, which is still too confusing.

The creation of the British Business Bank is a huge step forward and reflects the approach taken by this coalition Government to business, often by people in government who have had real experience of running a business with all the frustrations and pleasures that this entails. It is particularly pleasing to see that only 19% of British Business Bank’s business has been in London, so more than 80% is in the rest of the UK. It has ambitions to unlock further substantial sums as the new legislation allows. This is, of course, in addition to the £6 billion of growth deals announced by the Government yesterday, which is a separate matter.

I want to emphasise that the British Business Bank is not the only source of finance to businesses arranged by the Government. I particularly recommend to your Lordships the Business Growth Fund, an organisation that is finally coming to fruition and is investing equity finance into British business. I look forward to the British Business Bank reporting that its allocation of close to £3.9 billion has been deployed. I very much hope that all parties, while they may not have supported every aspect of the Chancellor’s successful recovery, will commit in their forthcoming manifestos to support the British Business Bank.